For Abu Dhabi and Citi, Credit Crisis Drove Deal

A falling dollar, a growing pile of oil revenue and an interest in not being overshadowed by neighboring Dubai’s increasingly high profile spurred Abu Dhabi to break with its low-key investing tradition to purchase a big $7.5 billion stake in Citigroup.

That is the view of analysts, economists and deal makers who keep an eye on the secretive Abu Dhabi Investment Authority, the largest sovereign wealth fund in the world, with assets estimated at $650 billion. Despite its size, Abu Dhabi’s royal family has been largely content to pour money into low-return, low-profile investments — until now.

But Abu Dhabi, the largest oil producer of the seven city-states that compose the United Arab Emirates, is worried enough about the eroding value of its pile of petrodollars that it appears ready to pursue more big-ticket deals.

With the dollar shrinking, “they’re watching them depreciate and that’s driving their anxiety,” said Marc Ginsberg, former United States ambassador to Morocco, who has worked with companies in other emirates.

Citigroup’s motivations were just as great. The company’s shares have dropped sharply since October, when billions of dollars in write-downs first started to mount. Later, Citi took another $8 billion to $11 billion charge related to bad subprime mortgage investments, which could wipe out its fourth-quarter profit. As a result, it offered Abu Dhabi generous terms to get its money.

Both sides were driven together by the credit crisis that struck the American economy with such force this summer. Abu Dhabi, like other oil producers, has an interest in making sure the United States economy does not weaken further, said Mr. Ginsberg.

And ever since Charles O. Prince III resigned as chairman and chief executive last month, and while Citi’s board has searched for a new leader, analysts and investors have renewed calls to dismantle the company.

Sources close to the deal, who did not want to be quoted because they were not authorized to comment, said Abu Dhabi, a longtime Citi client, had been looking to make a play in financial services to take advantage of market dislocation. They said the emirate had considered buying mortgages or distressed loans.

But in recent weeks, it decided to invest directly in financial institutions. The Abu Dhabi fund’s original plan was to buy small stakes, say $1 billion or so, in five or six different firms. But it zeroed in on the idea of making a big investment in Citigroup, those close to the deal say, after Mr. Prince was ousted.

Through its relationships with Citi in the Middle East — Citi has 14 offices and 4,000 employees in the region — Abu Dhabi reached out about making a deal. The point person for Citi was Michael S. Klein, the co-head of Citigroup’s investment bank, who had spent time in the Persian Gulf region when he ran Citigroup’s Europe, Middle East and Africa operations. The negotiations took place in large part over the telephone and in video conferences before Mr. Klein and later Robert E. Rubin, the new chairman of Citigroup and a former Treasury secretary, boarded a plane to the Gulf to complete the deal.

Abu Dhabi’s 4.9 percent stake means that nearly 10 percent of Citigroup will be controlled by Middle Eastern investors. Prince Walid bin Talal of Saudi Arabia already owns a stake of roughly 5 percent after bailing out the company in the early 1990s.

Given sensitivity to past Arab investments, particularly last year’s aborted sale of some American ports to a Dubai firm, Citigroup officials alerted Congressional leaders in Washington before announcing the deal with the sovereign fund.

“I spoke to them at some length about it the day before,” said Senator Charles E. Schumer of New York, chairman of the Joint Economic Committee and a senior member of the Senate Banking and Finance Committees, referring to senior Citigroup officials.

“It seemed to me that this is good for Citigroup, it’s good for jobs in New York. It bolsters their capital position, allows what is fundamentally a very strong company to weather a difficult time,” said Mr. Schumer.

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He contrasted the sovereign fund’s deal with Citi to the aborted Dubai ports deal. “My worries relate when there is a very strong security interest as in the ports deal or if they are buying an entity that is not purely an economic one,” he said.

Abu Dhabi has given assurances in other deals that their investments are driven only by economic considerations, not political ones. “They have made those assurances and have lived up to them in the past,” Mr. Schumer added.

In a complex transaction that has been blessed by federal regulators, the Abu Dhabi fund will have no role in the management or governance of Citigroup, nor any presence on its board.

“I think this is a terrific deal for Citi and the global market place as a whole,” said Sanford I. Weill, Mr. Prince’s predecessor and mentor. “One has to be impressed with how quickly the new leadership team put this together.”

But Abu Dhabi’s ruling family, headed by Sheik Khalifa bin Zayed al-Nahyan, will own the largest individual stake in Citigroup when the deal closes, edging out Prince Walid of Saudi Arabia.

The sovereign fund, started in 1976, has nearly double the assets of the next largest, Norway’s government pension fund, according to Standard Chartered, a British bank.

Bankers in the Middle East said the sovereign fund had traditionally funneled more than three-quarters of its cash into other big global investment funds, and eschewed large individual company deals. Investing through other funds has allowed the Abu Dhabi fund to maintain a low profile and to track money flows around the world that could make future big investments like the Citi deal easier.

Sheik Khalifa is also the fund’s chairman and president of the U.A.E., which was ruled by his father, Sheik Zayed bin Sultan al-Nahyan, for nearly 40 years until his death in 2004. Sheik Zayed was largely credited with helping transform the U.A.E. from a collective of nomadic Bedouin tribesmen to an oil-rich nation with a high literacy rate.

While Abu Dhabi contains about 94 percent of the oil reserves in the U.A.E. and includes about 87 percent of the country’s land mass, the city-state’s international profile has paled in recent years in contrast to that of its neighbor, Dubai.

Thanks to a series of big-name deals and an audacious growth strategy, Dubai is becoming a tourism destination, a regional financial center and a favored buyer of marquee assets. On Monday, Dubai International Capital said it had bought a substantial stake in the Sony Corporation.

“They are different animals,” said David Butter, the Middle East regional head at the Economist Intelligence Unit, comparing Dubai’s growth strategy with Abu Dhabi’s. “The purpose of A.D.I.A. is to invest surplus cash in assets that would provide steady gain and returns over time,” he said, while Dubai, with less oil reserves, has had to create its own sources of wealth.

Recently, though, Abu Dhabi has “generally been changing its approach” to investments, said Mr. Butter. With the creation of a new investment arm, Mubadala Development, in October of 2002, Abu Dhabi started to invest directly in projects like Nigerian telecommunications and power plants in Algeria.

With the Citigroup deal, the Abu Dhabi fund has purchased part of one of the world’s biggest banking franchises for a bargain price. A Punk, Ziegel & Company analyst, Richard Bove, raised his rating on the bank yesterday to buy, from market perform, saying the dividend was safe and the franchise was strong.

Citigroup’s stock closed at $30.32, up 52 cents yesterday, the day after the announcement of the sovereign fund’s stake.

Like other sovereign wealth funds, the Abu Dhabi fund is looking for investments to help diversify foreign currency reserves earned from exporting oil.

Its shift in investment strategy is not immediately being accompanied by an increase in public transparency. Several calls to the company’s headquarters in Abu Dhabi went unreturned.